Europe Sinks Its Flagship Carbon Trading Scheme

BERLIN --
All German Chancellor Angela Merkel had to do was pick up the phone and dial her people in Brussels. Had she done so before the European Parliament's (EP) key vote last month on April 19, her party's representatives could easily have saved the EU Emissions Trading Scheme (ETS), Europe's flagship mechanism for reducing carbon emissions. But the woman once hailed as "the climate chancellor," didn't make the call, a consequence of differences of opinion on the ETS within her ruling center-right coalition, she said. The impotent ETS is now withering on the vine, where it may remain until it is dead altogether.

Although even proponents of the ETS saw the proposed reform as stop-gap tinkering, the EP’s failure to revive its faltering mechanism could have wide-ranging implications for renewable energy expansion in Europe, especially for countries without a feed-in-tariff pricing system.

“This was a hugely important vote and a backlash for European climate policies. If this vote will not be corrected we are entering into a re-nationalization of European climate and energy policy,” says Regine Günther of the World Wide Fund For Nature Germany, one of the country’s biggest environmental NGOs. “Carbon emissions have to have a price to make the shift from CO2 intensive fuels to renewables attractive”

“Because of the way the electricity market in Germany is structured, the lower the price of carbon, the more you pay for renewables, and the more carbon-intensive fuels you have in the mix, “ explains Ms. Günther. “This is why Germany is burning so much lignite coal now. It’s a fatal spiral downwards.

Launched in 2005 to much fanfare, the ETS was meant to be the centerpiece of Europe climate policies and a best-practice pioneer that other continents and countries would replicate. (Despite its travails in Europe it has been copied across the world, from California and New England to China and Australia.) The ETS covers roughly half of the factories, power plants, and airlines in all 28 EU member states, accounting for half of the EU's emissions of CO2 and 40 percent of its total greenhouse gas emissions.

The goal of the "cap and trade” system is to set limits on emissions and allot allowances in the form of permits. If companies emit more carbon than the allowances they possess, they are forced to purchase more permits to compensate. If they emit less, they can sell their extra permits. The disincentive would make fossil fuels more costly and the price of renewables more attractive, and ultimately drive down carbon emissions. The EU’s goal was to reduce 20 percent of its total emissions (from 1990 levels) by 2020.

But the ETS never lived up to its hype. The number of permits issued was too great from the onset, which pushed the price of carbon down to less than 10 euros a ton. Moreover, the eurocrisis caused a contraction of production and lower energy demand, thus further exacerbating the market’s surplus of carbon permits. Experts say that permits would have to cost at least 30 euros a ton in order to dissuade companies from using high-carbon-emitting fuels. The EP was voting to “backload” the market, an initiative that would have reduced the excess supply of permits and thus push up the price of carbon on the carbon market. Most observers called the back-loading a patch-up job of a mechanism that ultimately requires a much bigger overhaul.

But Europe’s center-right EU parliamentarians, taking their cue from a powerful business lobby, blocked the efforts in a razor thin vote. They noted that Europe is already close to meeting its 2020 emissions goals, a result not of climate protection measures but of weak economic activity. Today the price of carbon is less than three euros, a record low.

Just how much the ETS impacts renewables growth is a matter of contention.

“The ETS has to date not been able to drive investments in renewable, and it is unlikely that it could even were it healthy, namely reflecting the true price of carbon,” explains Luci Tesniere Senior Policy Advisor at the European Council on Renewable Energy in Brussels. “Renewable energy developments would not have happened at all without renewable targets. Now more than ever, binding 2030 renewable energy targets are needed to show the direction to investors in the renewable energy sector.

“Renewables will suffer in the long-run, especially if other renewable support schemes eventually fall away,” explains Dr. Christoph Riechmann of the consulting firm Frontier Economics in London. “The higher the CO2 costs, the more competitive renewables become compared to fossil fuels. The ETS was one way to make renewables more competitive.” Another way to change the equation, says Riechmann who also calls the back-loading scheme a short-term fix, is to set a clear emissions reduction goal beyond 2020, and to make this tighter than the 2020 targets.

Alexander Knebel of the Berlin-based Agency for Renewable Energies, a think tank and advocacy group, says that the impact on renewables could be greater in countries that don’t have a strong feed-in-tariff like Germany. “Given the ETS’s low price level, it has ceased to be an effective instrument for climate protection,” Knebel says. “In terms of renewables, even without the ETS Germany has a feed-in-tariff that helps level the playing field between fossil fuels and renewables. It’s a mechanism that has proven itself much more effective than quota systems, which the ETS resembles when taken alone [without support schemes like the feed-in tariff].”

But Ms. Günther of the WWF says the issue is extremely relevant in Germany,. “There’s a heated debate going on right now about the cost of renewables in Germany,” she says. “There’s a lot of pressure to cut the feed-in-tariff for renewables. A relevant carbon price would increase the price of electricity at the stock market but it would have the effect of lowering the amount consumers have to pay in terms of the incentive for clean energy.”

According to the European Wind Energy Association (EWEA) in Brussels, the low price of carbon will adversely affect the investment climate for clean energy technology in Europe. “Because investors believe that the low cost of carbon will persist, there’s no incentive for investment in wind power,” explains Remi Gruet, a senior staff member at the EWEA. “We need a level playing field for new-build investment opportunities. In its present form, the ETS has no impact on investment decisions in the power sector.”

Germany doesn’t dictate environmental policy in the EU, but as the biggest and most economically powerful actor, it has plenty to say about climate policy. While it is unlikely that anything will happen between now and the autumn nationwide election, many observers think that Merkel could put it back on the table were the vote to change her coalition partner, which polls say is likely. Speaking earlier this week at the Petersberg Climate Dialogue in Berlin, she as much as promised this. The Petersberg event is a warm-up to the annual U.N. Climate Conference, which will be held in Poland later this year.

45 Comments

The science of CO2 and how to solve the problem varies with which side of the fence one happens to be sitting on. While people are arguing and progress is being impeded the PPM number keeps rising and the oceans and temperature right along with it. Eventually the problem will solve itself, but we are not going to like nature's way of solving it. Many large companies act like there is no tomorrow and they may be right!

I think it is a good idea to charge a fee or tax for our exported carbon. Perhaps an agreement can be worked out to produce an agreed amount of offsetting renewables as part of a package paid for by the fee. Especially if the offset permanently removes carbon sources here. To be fair, any carbon emitted during production and maintenance is best subtracted from the offset to ensure the right amount of Lbs of carbon per MWh is credited.

We (North America) could actually provide an alternative for the EU emission trading scheme. It would reduce their consumption and balance our budget... (this is of course partly tongue in cheek)

1) Add a $30/metric ton on coal exports

2) Add a $30/barrel surcharge on oil related exports

3) Add a $5/MMBTU surcharge on natural gas, LPG, LNG exports...

This would put money back into the US treasury -- and the prices would reduce the EU consumption. It would also help with the Chinese balance of trade.

This is tongue-in-cheek of course... so many problems with it. But I've tossed it out in part because I have often heard friends in the EU say... America must do this... and they are quite surprised to find that they are importing much of their energy from the US (including refined fuel).

One of the battles that was fought over the EU emission trading program involved inbound flights to EU and accounting for the CO2 the planes produced. This would have included all international flights including non-EU airlines. But at the time the non-EU airlines didn't have a CO2 allocation grandfathered to them (if I remember correctly) - which would have put airlines from other non-EC countries at a disadvantage. Eventually it was tabled. But during that time there was a lot of arguing that US wasn't doing their share... and of course we were selling coal for use in Europe.

Pierrot... The US citizenry is generally all for doing what is right, as evidenced by the last presidential election. But then, the gargantuan corporate money machine, and all the minions it enslaves, enter their biases to remove any sense of reason involved. What planet have you been living on?
IMO, SRECs would be a good way to move into the solar age funded by carbon purveyers, as many eastern states are now doing on their level. IT works!
A national RES and solar carve-out mandates would swiftly and fairly change the game and those that want to can buy into the future by investment in solar hardware or developments. Even the banks would profit because SRECS cover the cost of money. It also gradually phazes out as solar dominates over carbon producers, and they fall away from disuse and lack of profit, since it is market based. Read up on it.

For an example of how a carbon tax fight might unfold, consider Alaska and Wyoming.

Both have resource severance taxes that they collect. Alaska's tax is on oil, Wyoming's is on coal. Change the name of either tax to the Alaska CO2 severance tax, or the Wyoming CO2 impact taxes and you would see political action groups across the nation funding fights to repeal the taxes -- even though they might have only been a name change.

In many countries TAX is considered to be an evil four letter word. A carbon tax might be the way to go, but if it isn't implemented because of long drawn out fights because of "TAX" then there is zero benefit.

Worse yet, while concentrating on trying to get a carbon tax implemented - efforts to improve energy efficiency and increase renewable energy deployments are waylaid/stalled.

It would be easier just to add a CO2 severance tax for any primary energy source that results in CO2 and originates underground. And zero out their related subsidies. Any attempt to do this in the US is likely to spend years in the debate mode... :-(

If a bottle of pop holds .00001 tonne of fossil carbon in it, add the equivalent tax to the bottle's price. Charge it to the end user or manufacturer/bottler, whichever is easier. Why is that so complicated?

And why worry about such minute details? smoke screen/red herring in order to distract from SUV and coal plant emissions?

Pierrot, I've made similar arguments and other readers have pointed out that opening a bottle of sparkling water - allows CO2 to escape. Baking certain meals at home which use baking soda (sodium bi-carbonate) might release CO2. The question then becomes how far down the food chain do you go when you collect the taxes.

And of course not all countries would even try to collect the taxes.

The EU emission trading scheme was an attempt to reduce CO2 without collecting taxes, the emission trading program is having significant problems.

Carbon taxes seem nearly impossible to adopt in major countries, that really means aggressive energy efficiency programs and renewable energy programs are the two of the remaining options that have been producing results.

Maybe add a premium for future damage being accumulated in the atmosphere, number which increases over time i.e., it keeps getting more and more expensive as concentration increases. Knowing that the cost will only keep rising can only be an incentive to cut emissions.

Julia-Ortmans, Europe is awake. The world is aware. The authors story line was about the demise of the EU carbon trading scheme. It didn't work, because of fundamental flaws. That does not mean that they will all go out and buy the largest hummers possible and idle them sitting in their driveways.

The author incorrectly implies that with out emission trading all is lost. It is not. In fact, the emission trading scheme had nearly zero impact in Germany. Instead most of the significant impacts have been a result of public awareness campaigns, solarPV programs (EEG), push to deploy wind plants, changing out old lightbulbs with cfl or led, more efficient cars, electric vehicles, good public transportation, etc.

If anyone needs to have the seriousness of he environmental situation and especially for those who naysay the scientists, please read Before They're Gone by Michael Lanza. No charming family trek this, as the poor description on the cover describes - and as an editor of Backpacker magazine who has climbed all his life this book marks the terrifying changes in America's National Parks - and what it suggests for the rest of the world.
Wake up Europe - wake up world!

John Benton, I looked and could not find any CURRENT (less than 18 months old) reports on the Royal Society of Engineers website or their available publications. There are reports from 2008, but those are so old and reflect prices for modules that are five or six times higher than you would buy today.

Bob, I did find a very interesting report on the German FiT presented to the Royal Society...

http://www.raeng.org.uk/events/pdf/euro_case_2008/Frank_Behrendt.pdf written by Frank Behrendt, Berlin Institute of Technology, November 2008. It does a nice job explaining the FiT -- and it includes the definition of systems that are eligible for the SolarPV FiT -- which effectively closes for new systems in 2015.

MJMIZERA, it isn't that we should not use biomass and biogas, the point is if 100% is used to produce energy, that still isn't enough.

Using biomass/biogas from the waste stream doesn't solve ALL the problems - it just eases the problems. The Germans count that biomass/biogas production into their renewables they generate today. In 2012 it was about 6% of their power generation.

Biomass/biogas provides thermal energy to run steam plants -- that's good -- because that is a spinning mass; and of course IT IS BASELOAD generation. (I added that since there are individuals that believe renewables can't provide ANY baseload...)

Biomass, biogas from municipal wastes are being used. Most new waste treatment plants are designed to harvest the power (US and Europe). But it is not enough to power cities and countries. It powers the plants and perhaps the a few a thousand residential/business customers around the waste treatment plants.

Plants are being upgraded - nearly always include the additional capture and scrubing steps.

Germany in their energy renewable plans - already have that figured into goals for 2020 and beyond...

""If you were to take every gram of crops produced anywhere in the world for all purposes — and that includes every grape, every ton of wheat, every ton of soybeans and corn — and you were to use that for biofuels and essentially stop eating, those crops would produce about 14 percent of world energy," says Timothy Searchinger, an associate research scholar at Princeton University."

I'm just a retired farmer, among other persuits, and I put PV in my yard after selling the farm. it gives me pollution free electricity, pay in cash from the Ute, and SRECs to boot. Beats the offerings of other investments these days, and I can't eat the cash. So I guess it depends on which end of production wire you see yourself. I'd say the efficiency is way over 100%. Everything I get is more than free.

With Germany importing coal from other countries - they could add a carbon import tax as an alternative to the existing cap and trade. Or the exporting countries could add an additional coal severance tax for the shipments outbound. Both would have the impact of increasing the cost of the energy from coal - and both would then encourage the continued development of alternative renewable energies.

Back to the authors original story line... Europe sinks its flagship carbon trading scheme. It was at best a half hearted attempt at trying to use market forces to reduce CO2. Too much CO2 was grandfathered in, the CO2 allocates digressed too slowly, early on they excluded some of the key industries that were the largest emitters, they didn't have in place good fraud detection.... etc.

While it offered hope to some, it was also provided paths for others to not become more efficient or reduce their CO2 output. The debates have been raging for several years within many of the EU countries and states within those countries. An example was the concept of carbon capture and sequestering - the original plant was for uniform laws covering the process, efficiency of the storage, and how to handle leaks of CO2. Those discussions in Germany were tabled nearly a year ago, they have stalled in other countries. Capture and sequestering was supposed to provide producers another alternative to buying CO2 allocations. The laws didn't occur -- and companies such as Vattenfall stopped their plans.

Energy efficiency improvements are also a must - and much of those improvements needed to becoming from all across all aspects of the German and EU economies, industry, transportation, commercial and residential. The EC had come up with their 20/20/20 plan, 20% renewables, 20% efficiency improvements and 20% CO2 reduction by 2020. They were not meeting the targets. With targets not being met for 2020, the price of CO2 on the ETS should have been climbing out of sight. It wasn't! That further adds evidence that the ETS was broken long ago and less effective than originally hoped.

As for the increased lignite use, Germany has goals to shutdown much of their surface mining by 2020 (actually 2018). They will still need coal for their energy production well into 2030-2040. The coal they need will be imported from countries in North and South America.

In general I do not disagree with your comments; however I think you would make your points much stronger if you did not use reports and data that are associated with the clean energy industries. Instead use EIA data, use the data from EPRI (FERC and NERC), and even some of the traditional power engineering media (Power-Engineering), Power Engineering Society (IEEE-PES), etc.

Nearly all your points can be substantiated with data from those sources - and the readers would have a much more difficult time dismissing the reports as biased.

"Adding wind power and other renewable energies to the New England energy portfolio is also making the energy market more competitive, benefiting consumers. Power system analyses of the Midwest, Texas, Mid-Atlantic and New York by independent utility systems experts have found that market prices in areas with wind power have been significantly lower than if wind had not entered the market.

In fact, a 2010 New England Wind Integration Study found that wholesale electricity prices would decline anywhere from $5 per MWh to $11 per MWh if the region generated 20 percent of its power from wind, depending on which sites were used for wind production.

http://www.evwind.es/2013/04/01/wind-power-saves-money/31455

"The business case for wind is very compelling," said Paul Gaynor, CEO of developer First Wind. He said wind power is now saving consumers large sums in Massachusetts and Connecticut—to the tune of $1 billion and $800 million, respectively.

The PJM Interconnection could save its customers $6.9 billion if it more than doubled the amount of wind energy it currently plans to build. This is according to a study by Americans for a Clean Energy Grid and Synapse Energy Economics.

A large portion of the consumer savings come in by phasing out fossil fuel-fired generation, particularly coal power, which must buy their fuel, and replacing it with wind energy, which does not. Even with the capital costs of building wind turbines, the study shows the benefits more than balance out in favor of wind energy, he said.

john-benton, there is a very big difference between "unreliable", "variable" and "predictable."

The NERC (US & Candada electric grid reliability) recognize solarPV as being variable and predictable. They do not call it unreliable.

Energy sources that can be predicted more than fifteen minutes into the future and can be predicted to produce for at least fifteen minutes can be dispatchable. (That is environment the electric grid is now moving toward.)

There is also a considerable amount of work underway to understand the air currents/flows, create better models, and installing meteorological such that wind resources could be accurately predicted and used as dispatchable resources.

Adding 5%-10% of their capacity to either wind or solarPV makes them very dispatchable.

A large PV array was just completed in the UK for $1.60/watt. Plug that into an LCOE with SoCal type sunshine and one approaches five cent electricity.

Can you say "about the same price"?

As for solar and wind being useless for most practical purposes, that's simply ridiculous. If you had paid any attention at what is happening in the world today you'd know that wind and solar are beginning to play significant roles.

You do talk a lot of nonsense. If you want to comment publically you really do need to research your facts. Solar power is currently around four times the price of gas. These facts are readiy available from several reliable sources but I suggest one of the most unbiased is the Royal Society of Engineers whos members work in all areas of power generation. Even if solar did ever become competitive on price it would still be useless for most practical purposes due to its unreliability. The same goes for wind.

There were signs that the cap and trade program was in trouble a couple of years ago already. The notice to stop trading on the Munich commodity markets was made in June 2012, with trading ending in October 2012.

It wasn't only the Oil and Gas industries that were the only culprits. It was the steel, fertilizer and aluminum industries in Europe.

Professor Clive Spash (Norway), also wrote an interesting paper back in 2009, which in essentially says, EU was focusing on the wrong things - NO it wasn't producing more O&G, but the focus should have been conservation, changing behavior, changing economic models, etc.... (page 38) In the end he suggested that it might take a failure in a CO2 cap and trade market for the countries to take REAL action to reduce CO2.

The fossil fuel industry is quite powerful. They stand to loose trillions of dollars in earnings if people move away from fossil fuels. The fossil fuel industry will vigorously fight back and they'll win a few battles. But they almost certainly will loose the war.

The price of installed solar is so low in Germany right now that any sort of subsidies could go away and solar installations would keep on course. People can save serious money by installing solar.

The price of wind-generated electricity is low and, when installed, locks in that low price for many decades. Utilities are installing wind as a hedge against rising natural gas prices. (New coal is simply too expensive to consider.)

Renewables are much less dependent on subsidies than in previous years. Renewables will continue to be installed. Removing subsidies, carbon costs, etc. might slow down the acceleration of renewable installation but that won't stop renewables. Continued falling renewable prices will boost installation rates.

We, as a group of people living on a dangerously warming planet, might decide that it is in our best interest to further accelerate the rate on renewable installation. That's the role of subsidies/carbon costs going forward - to make the transition away from fossil fuels happen as soon as possible.

Salim, I have no idea what you're talking about. Renewable energy installations are accelerating around the world, rates of installation increasing as costs fall.

Wind is one of the cheapest ways to bring new generation to the grid. PV solar is far cheaper than gas peaker plants for meeting midday peak demand. PV solar is cheaper than new nuclear, new coal, or old coal if we include coal's external costs.

Installing wind or solar locks in a very good price for electricity for the 20 years normally used in LCOE calculations. After that, since the facility is paid off, the cost of electricity drops to almost zero/kWh for another 10 to 40 years.

We would have no difficulty running our grids off nothing but wind, solar and storage. Including other renewables such as geothermal, tidal, hydro, and biomass/gas makes it even easier and more affordable.

We don't need to invent anything. We just need to install what we have in hand right now.

(BTW, hydrogen is not a producer of energy. It is a storage method, sort of a battery. Fusion, if ever invented, might be something we could use when/if.)

Hi: Phil, I am surprised you disagree... I do not disagree with what you wrote at all... The example of bio was just that, an example, of how O&G stops anything that threatens their cash flow... Cars can go full electric now tech wise but bio D. is needed for heavy equipment, bull dossers, 18 wheelers, dump trucks, earth movers, etc.. It needs to be there as a transition until energy densities rise to handle that level. I agree, it all rests with the people but that to a certain degree is anti-climatic...
And #8.. Hydrogen is an energy carrier, not a net gain source..

The Scheme failed to deliver as intended. And may have even been misused. So I am not surprised that it is heading towards its consequential ultimate end. Despite vigorous efforts, the renewable energy options have yet to see the light of the day insofar as practical, continuous sources of energy at affordable price is concerned. It remains a hype. Unless the scientists finally succeed in coming up with a bulk producer of clean energy such as hydrogen or fusion, the pursuit of countries towards their economic development goals and limitless desire for more prosperity and wealth will continue to induce them to burn oil, gas and coal no matter what impact it may have on the environment.

Cap & trade was doomed to fail. You take a system the is regularly adjusted by a political system and the political system will not deal with it in a pragmatic or efficient way. I am for a carbon fee and rebate instead. It is accountable, easy to implement, doesn't bounce around with annual certificates to pollute, is not a financial derivative, easy to enforce, penalizes the high energy users more, favors the lower and middle classes, etc.
Cap & trade is a loser in the long run. It hurts the economy by making energy prices more volatile, as carbon fee makes it more stable. Good riddance to C&T!

I respectfully disagree, Mr Fitch. The real energy source is the sun! The only way the petro and coal corp's can seem powerful is to use carefully planned tactics to make their polluting products seem essential. Militarism is a huge part of it. The military is heavily invested in fossil fuel, perhaps because of the ability in it to scale up and mobilize quickly. It is also the basis for the manufacture of war machinery.
We can see in these attributes, the the net value as back-up sources of concentrated energy, not the mainstay. Using benign solar energy is the only truly sustainable source. The use of burn-tec methods are steadily obscuring the clear skys needed to obtain the solar energy we depend upon. The industries that made dependance upon fossil fuels their mainstay do not see this happening. Even the for-profit medical industries sees no downside, as yet, to escalated health care costs. Yet in billions of years of evolutionary advancement, no species has been allowed to flourish if it leaves it's own life support commons in poorer condition for their passing. This equation is scaleable and linear. It certainly fits in rapidly expanding life forms. The question seems to be on the altar, whom or what is the truth and mind we will choose to ascribe our identity to.

Wind, Water and Sun, for a cleaner world and economy. No need for bio fuels which have drawbacks and are not nearly as clean as WWS:
http://www.youtube.com/watch?v=_XCYlCF3QuQ&feature=youtube_gdata_player

regarding the power of dirty fuel companies, it is simply up to us citizens taking responsibility; it's starting to happen with college divestment. This next generation has been born at the height of climate and environmental awareness.

I think George Monbiot summed this parody of inaction up rather well in his latest article, 'Via Dolorosa - Corruption and short-termism are pushing us along the path of sorrows.' http://www.monbiot.com/2013/05/10/via-dolorosa/

[snip]
The European Emissions Trading Scheme, which was supposed to have capped our consumption, is now, for practical purposes, dead. International climate talks have stalled; governments such as ours now seem quietly to be unpicking their domestic commitments. Practical measures to prevent the growth of global emissions are, by comparison to the scale of the challenge, almost non-existent.

The problem is simply stated: the power of the fossil fuel companies is too great...Without a widespread reform of campaign finance, lobbying and influence-peddling and the systematic corruption they promote, our chances of preventing climate breakdown are close to zero.

So here we stand at a waystation along the road of idiocy, apparently determined only to complete our journey.

Hi: O&G in all its forms is much more powerful than any given country. In all practical terms they control the world. Is it really such a stretch to say that? After all, if you control energy you control the world, for EVERYTHING requires energy to function, including us. The only thing more powerful to control than energy is the weather. This is why you see upticks in RE and then all of a sudden it gets knocked down.

Look at bio diesel in the US. It was going hell bent upward making some REAL inroads. Then, along comes an article in a major magazine "of the times" twisting and distorting the truth about the fuel and wham. Demand dries up and the market collapses. Do you think that article just happened along.... and as usual the masses swallow it hook line and sinker as being the truth. They can't see "through the mist" if their lives depended on it, which actually it does.....

She has seen the way the wind is blowing (sorry) and realised that however much people like 'free clean energy' in abstract principle, they aren't so enamoured when they find it comes at enormous pocketbook and convenience costs.

It is a vote loser everywhere, and she can't ignore it.

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Paul Hockenos is a Berlin-based author who has written about Europe since 1989. Paul is the author of three major books on European politics: Free to Hate: The Rise of the Right in Post-Communist Eastern Europe, Homeland Calling: Exile...